Walking the contractual tightrope: a transaction cost economics perspective on social impact bonds

Journal article

Transaction cost economics is applied in this paper to social impact bonds to explore how public service commissioners could improve outcomes-based contracts. The authors supply a framework for assessing the quality of outcomes specifications and clarify the trade-off between a robust value case for government and the transaction costs associated with specifying such a deal. Illustrated by two examples, the authors suggest that commissioners aim for a ‘requisite’ contract: one that minimizes opportunism while balancing the costs of developing a more robust outcomes specification.

Policy-makers and managers are increasingly looking to outcomes-based contracts, including social impact bonds, as a way to improve social outcomes. The success of these contracts is predicated on how well-specified the outcomes are within them. This paper provides practitioners with an easy-to-use framework for assessing outcomes specifications. They need to consider the definition of the eligible cohort; the alignment of payable outcomes to the policy intent; and the accuracy of prices for attributable outcomes. Practitioners should aim for a ‘requisite’ contract—a contract that minimizes service provider and investor opportunism while balancing the costs associated with developing a more robust outcomes specification.

Authors: Fitzgerald, C; Carter, E; Dixon, R; Airoldi, M

• Publication status: Published
• Peer review status: Peer reviewed
• Publisher: Routledge
• Journal: Public Money and Management
• Volume: 39
• Issue: 7
• Pages: 458-467
• Publication date: 2019-03-21
• Acceptance date: 2019-01-30
• DOI: 10.1080/09540962.2019.1583889
• EISSN: 1467-9302
• ISSN: 0954-0962
• Language: English
• Keywords: payment-by-results; outcomes-based commissioning; FFR; public service contracting; transaction costs; social impact bonds